Sponsorship Speech: Budget Reform Act

Sponsorship Speech of Senator Loren Legarda
Budget Reform Act
Senate Bill No. 1761, Committee Report No. 304
21 March 2018 | Senate Session Hall

Mr. President, esteemed colleagues in the Senate,

It is my honor to sponsor today a proposed measure that will change the way we do budgeting in this country. It will make our budget system one of the best in the world.

With your kind indulgence, may I present Senate Bill No. 1761, under Committee Report No. 304, or the proposed Budget Reform Act.

At a Glance

The Budget Reform Bill (BRB) is vital at this point in our country’s ongoing development and growth because it was crafted specifically to institutionalize many reforms that are meant to cure a number of weaknesses in our public financial management (PFM) system.

It will provide, as well, the necessary mechanisms to help achieve the Administration’s goals of propelling the economy to grow at 7% to 8% from 2018 to 2022, putting the country into upper-middle income status by 2022, and reducing the poverty incidence from 21.6% in 2015 to 14% by 2022.

To achieve these lofty goals, the Duterte administration has adopted an expansionary fiscal policy. It is investing heavily in infrastructure development via its “Build, Build, Build” Program, targeting total infrastructure spending to reach 7.3% of GDP by 2022. Historically, the Philippines has only spent 2.6% of GDP during the last half century. The exponential rise in the planned infrastructure spending would need a modern, efficient and transparent budget system.

The benefits of the “Build, Build, Build” program are crystal clear. By building quality roads and bridges, airports, commuter and cargo trains, urban rail systems, and other infrastructure facilities, the mobility of people, and the transport of agricultural products from the farm to the market would become easier, comfortable, and less costly.

As President Rodrigo Duterte said on many occasions, “build, build, build” are words that refer not only to physical structures. These are tools to build a progressive nation, as well as transform our people – ensuring that their development needs are met so that they become more productive and rightly share in the overall progress of the country.

As an accompanying goal, the Administration also plans to invest heavily in education, health services and social welfare to develop the citizenry’s full potential.

This Budget Reform Act, if enacted, can be a powerful tool to bring these goals to fruition as it incorporates globally-recognized PFM principles and practices that could ensure that funds are carefully managed and used, and that the right goods and services are delivered to their potential beneficiaries at the right place and at the right time.

May I also add that this measure will allow us to seal our remarkable spot in fiscal transparency among the countries of the world. Early this year, the International Budget Partnership’s Open Budget Survey (OBS) released its 2017 Open Budget Index results. The Philippines scored 67 (perfect score is 100); this is up from 64 in 2015. The Philippines’ score is much higher than the global average of 42. This made the Philippines number one in Asia for budget transparency and number 19 in the world (out of 115 countries surveyed), a significant improvement from number 23 in 2015 (out of 102).

In the area of public participation, the Philippines has likewise surpassed other Asian countries. The Philippines is one of the top four countries in the area of public participation. The other top three are all first-world countries.

What does this recognition tell us? It indicates that the world community has come to recognize the Philippines’ improved efforts to pursue fiscal transparency by making budget information comprehensive, timely, and accessible to the public. This bill incorporates provisions on budget transparency which could institutionalize these desirable efforts.

What is our role as legislators in the midst of all these?

It is within our power, our mandate, to make these goals achievable and sustainable.

Shifting from Weak to Strong Budget System

As I have mentioned earlier, this bill can provide a cure for many of our country’s PFM weaknesses. Certain weaknesses were identified in the Public Expenditure and Financial Accountability (PEFA) assessment conducted by the World Bank in 2014-2016, particularly in terms of budget credibility, reliability, and in accounting and reporting.

These weaknesses are highly technical, and as such may be addressed only through innovations and technology-supported systems. Such weaknesses include:

 weak linkage of the plan with the budget;

 slow budget execution;

 weak budget reliability;

 delays in the submission of reports due to manual recording of transactions; and

 ambiguity in the definition and use of savings, among others.

Allow me to give you a quick rundown on the key provisions of the bill, which could address these PFM gaps and weaknesses.

The Shift to Annual Cash-Based Budget

The biggest change that this proposed measure will effect on the budgeting landscape is the shift from a two-year obligation-based budget to an annual cash-based budget. This is the core of the reform – the one that will change the course of our budgeting system.

Under an annual cash-based budget system, contractual obligations incurred by the government for a particular year may not go beyond that fiscal year. This will do away with continuing appropriations wherein unused MOOE and CO are carried over to the next fiscal year. Likewise, payments should be made for goods and services delivered, inspected and accepted within the fiscal year, up to a three-month Extended Payment Period.

This new system will yield a number of benefits, which are guaranteed to be seen and experienced by our people. Let me cite a few:

1. Better planning of programs and projects. Knowing that programs and projects to be incorporated in the National Budget are those implementable within the year, heads of agencies will plan better for their programs and projects.

This bill will instill discipline among the planning, budget, and program/project officers of agencies. It will likewise promote closer coordination between them, to ensure that only implementation-ready projects are proposed for funding. Therefore, all other works such as project/program development, engineering designs, and other pre-construction activities should be completed prior to the request for funding.

2. Reduced underspending. Since budget implementation will be quickened, underspending will be greatly reduced, if not totally eliminated. Government underspending in 2014 and 2015 reached 13.25% (or P302.7 billion) and 12.83% (or P328.3 billion), respectively. Underspending means foregone opportunities; these are resources that Congress authorized but are not used or converted into goods or services that the people could have benefited from. In pursuit of its goal to reduce underspending, the Duterte Administration effectively cut underspending to 2.9% in 2017, thus proving in the initial run of the one-year validity of appropriations that such a goal is achievable. This bill would institutionalize this practice.

3. Foster a better business environment. With the shift to a cash-based budget, goods delivered or services rendered within the year will be paid within the same year, and up to a three-month Extended Payment Period. With the government as a good payor, more business enterprises will be enticed to engage with it.

4. Greater focus on implementation. With the one-year validity of appropriations, the practice of having continuing appropriations will be ended. Consequently, the budget process will be simplified. The unwieldy practice of simultaneously implementing programs and projects funded from the budget of the previous and current years will be a thing of the past. As a result, government executives will be able to focus on the current year’s activities.

This will also eliminate the practice of window-dressing where the national government will “park” money with government corporations to give the “illusion” that the former is utilizing the budget more quickly; in fact, the money is just parked with the government corporations. With this bill, the undisbursed surplus of the budget support to government corporations will have to revert to the Treasury if not used within the fiscal year.

The fiscal managers, however, are committed to help department and agency heads implement and complete their programs and projects faster. The bill seeks to institutionalize some measures that are currently being adopted or are in the process of adoption. These include, among others, the following:

 Early procurement. The BRA fosters and supports the practice of early procurement as the general rule, to ensure timely awarding of contracts and implementation of programs and projects. How do we do this?

For one, government agencies will have to adjust their procurement calendars, so that all procurement activities start from August of the previous year, which is the start of the early procurement period, until June of the current fiscal year.

 GAA as Allotment Release Order. The bill seeks to institutionalize the system, the practice which started in 2014 that already considers the GAA as an allotment release document and shall be the basis to enter into contract. With the GAA as the allotment order, government agencies can begin to award contracts at the start of the fiscal year. Except for releases from the Special Purpose Funds, no additional documents will be required from the Department of Budget and Management (DBM) before agencies can enter into contractual obligations with contractors, suppliers, or service providers. This reform will be institutionalized by the BRA, thus ensuring faster implementation of programs and projects. It will also limit the discretion by the DBM with regard to the release of funds.

 Multi-Year Contracting Authority. The implementation of projects that require more than a year will still be allowed, under a multi-year contract entered into by a government agency through a multi-year contracting authority (MYCA). An equivalent authority may be issued by government-owned and/or -controlled corporations (GOCCs), as well as by authorities of the local government units. These projects will be given multi-year funding based on a proposed project schedule. As such, only those appropriated for a given year will be released accordingly.

 Impoundment Provision. The bill also includes the impoundment provision under the 2018 GAA. It allows the President to propose the recession of appropriations to Congress when the appropriations are no longer required to fulfill the objective originally sought to be achieved or in case of unmanageable deficit. Congress is mandated to act on the impoundment proposal within 30 session days. Congressional inaction is equivalent to disapproval of the President’s proposal for impoundment.

Because of its significance, let me repeat: mandating the shift from an obligation-based budget to an annual cash-based budget system and redefining the validity of appropriations are the main game-changing features of the Budget Reform Act. To date, the Philippines is the only country in the world that has a two-year obligation based budget system.

However, the Budget Reform Act has other equally important features, practices and innovations that are vital in strengthening our public financial management system, in support of the country’s continued and sustainable development and growth.

Clarifying the Use of Savings

This bill clarifies the use of savings. The new definition of savings is made consistent with the Supreme Court ruling on the Disbursement Acceleration Program (DAP). It is meant to prevent possible abuse by executive action.

Through this bill, savings will only be limited to released but unobligated appropriations that result from (1) completion, final discontinuance, or abandonment of an activity or project; and (2) implementation of efficiency measures resulting in the delivery of the required or planned targets at a lesser cost.

Also, with the BRA, the Miscellaneous Personnel Benefits Fund (MPBF) cannot be declared as savings as it pertains to unreleased appropriations and composed purely of personal service items. With this reform, the controversial Dengvaxia deal will never happen again.

Promoting fiscal transparency and access to information

The Budget Reform Act will give importance to the voice of the people.

I mentioned earlier our accomplishment in terms of the results of the 2017 Open Budget Survey – a milestone that now makes the Philippines one of the global leaders in terms of budget transparency and public participation. While the high score speaks volumes of our improved initiatives in budget transparency and public participation, it likewise magnifies the call for greater responsibility in engaging and involving our citizens in the budget process.

We know that the phases of the National Budget mainly revolve around people who know the technical aspects of the budget. But this should not be an excuse to ignore the citizens’ voice in the process, especially since they know what their needs are.

This bill will ensure citizen participation. The budget process will be participatory through the establishment and implementation of participatory budget mechanisms in all phases of the budget cycle for wider citizen engagement.

The public will also have greater access to public financial information, as the BRA requires posting of all documents and reports in the government website. Under the BRA, the DBM is mandated to publish the “People’s Budget,” a citizen-friendly summary of the government’s fiscal policies and expenditure priorities.

Modernizing the Philippine Budgeting System

The main goal of this proposed measure is to modernize the Philippine budgeting system: to make it advanced, credible, and compliant with international best practices.

The BRA will institutionalize reforms and practices that the government has initially, yet gradually introduced, in pursuit of a systematic and modern process of budgeting. Such need for innovations and technology-supported systems gave birth to, among others, the Budget and Treasury Management System (BTMS) which will later lead to the Integrated Financial Management Information System (IFMIS), Unified Accounts Code Structure (UACS), and the Treasury Single Account (TSA) for better cash management.

The IFMIS, once developed, will fully automate the country’s financial management information system, and will be the single portal for all financial operations by all government agencies, including GOCCs and LGUs. This will enable timely and more transparent reports on government transactions which can be used for management decision-making.

The UACS fortifies the use of an important accounts coding system for all appropriations in the GAA, as well as all government transactions. This will facilitate and harmonize the budgeting, accounting, auditing, and reporting of all government financial transactions. We can therefore better scrutinize the operations of agencies based on more accurate and timely reports.

Meanwhile, the Treasury Single Account (TSA), a tool for consolidating and managing the government’s cash resources, will be institutionalized. This initiative has been crucial in lessening borrowings, and progressively bringing down the share of the budget allocated for interest payments, and give way to more spending for infrastructure and social services.

Having a TSA will be a real test of our resolve to have a timely, transparent, and efficient budget system. With the TSA, the National Treasurer (or the President, or the Secretary of Finance, or the Secretary of DBM) would have at his or her smart phone, information on the cash position of the Republic in real time. Sadly, at the moment, with more than a thousand different accounts, such information are not readily available in real time. The BRA will institutionalize having a TSA. It will aid decision-making immensely.

Strengthening the “Power of the Purse”

The National Budget is the foundation upon which our agencies stand, solid and steady in the commitment to deliver public goods and services to the people, in pursuit of the goals of both the people and the government. The constant challenge is how to effectively link the National Budget with these goals: to ensure that one supports and fulfills the other.

And this challenge is best taken up by us, legislators.

Clearly enshrined in the Constitution is the power, vested solely in the Legislature, to appropriate funds. The power of the purse is our inherent power. It is our strength in ensuring the credibility in the use of public money.

This power is what the Budget Reform Act intends to strengthen. With a strengthened “power of the purse,” we can review and approve proposed appropriations based on the targeted and actual performance of agencies. This is to ensure that we give enough budget to all agencies—no overspilling, no underspending.

We will have the authority to limit the use of savings and strengthen accountability and transparency of our budget. Savings can only be used for the right purposes and reasonable situations.

More importantly, Congress will have a stronger power to prevent abuses of a re-enacted budget. As we value the role of the National Budget in providing for the changing needs of our people, we value the need to authorize a new budget yearly. Only in extraordinary times, should we resort to the re-enactment of the budget.

Improving Fiscal Responsibility

Another important provision of the bill provides for the review of all Special Account in the General Fund (SAGF) and Special Funds every three years by the Permanent Committee created under Executive Order No. 292, to determine if the same has to be terminated and modified under certain conditions enumerated in Section 47 of the bill.

Sections 15, 16 and 17 instruct the DBCC to prepare, subject to the approval of the President, the statement of fiscal policy which shall contain a measurable medium-term macro-economic and fiscal objective and a Medium-term Fiscal Strategy and its annual updates which shall include a summary of fiscal policies on revenues, debt, deficit, expenditures, and fiscal risk management. In addition, the DBCC shall also prepare and submit a Mid-year Fiscal report and an Annual Fiscal Report on the government fiscal program.

On the part of Congress, Section 20 will, as much as practicable, henceforth require that the filing of a proposed revenue eroding and expenditure bills should be accompanied by financial and budgetary information sheet, containing an estimate of financial and budgetary implication of the proposed bill for the initial year of implementation.

Conclusion

Ladies and gentlemen, this is what the Budget Reform Act (BRA) is all about.

It is a measure that promises not just change – for as we all agree, change has already begun – but the stability and permanence of change.

My dear colleagues, the Philippines is in a modernizing mode. Our goal is to be an upper middle income country by 2022. The emerging consensus is that we are on the right track.

The Build, Build, Build program would pave the way for the Golden Age of Infrastructure. Our investment in education, health care and social infrastructure would convert our young people into an agile, technologically-savvy work force; without question, a formidable asset in an aging world. But we need a modern, efficient, and transparent budget system to keep up with the exponential growth in government spending.

Having an annual cash-based budgeting system, some advanced and technology-based systems would propel the Philippines to have one of the best budget institutions not only in Asia but also in the entire world.

This prospect of a modern, efficient and open budget system is not an empty dream. It is within our grasp. The Executive Department has adopted reform measures that have catapulted the Philippines to be one of the best performing budget institutions in the world. But these reforms are not permanent; they can be reversed. Precisely, this bill seeks to institutionalize these reforms, set them into law, so that the next President, who at the moment is nameless and faceless, will be constrained from slipping back into the slow, weak and opaque budget system.

Mr. President, distinguished colleagues,

Let us join the Executive in this glorious quest for a modern budget system. Let us play our role and be part of the solution. I urge you to vote for this game-changing Budget Reform Act.

Thank you.